64. Internal Control Structure and Management Philosophy

Question 1

Describe the three objectives of a functioning system of internal controls.

Answer 1

1. Operations: Make sure the business runs effectively and efficiently.
2. Reporting: Ensure that financial and nonfinancial reports generated by the business are reliable, timely, and transparent.
3. Compliance: Ensure that businesses are compliant with applicable laws and regulations.

Question 2

To comply with the Foreign Corrupt Practices Act (FCPA), companies’ internal controls must be sufficient to provide reasonable assurances that:

Answer 2

Access to assets can only be permitted with management’s authorization.

The companies’ records accurately reflect transactions and the disposition of assets in accordance with GAAP or other relevant accounting standards.

Question 3

Briefly describe the five components of an effective internal control system as outlined by COSO’s Internal Control Framework.

Answer 3

1. Control Environment: Company’s attitude and culture toward internal controls.
2. Risk Assessment: Periodically review processes to identify risks and stay competitive.
3. Control Activities: Have controls in place to safeguard assets and ensure the proper recording of business transactions.
4. Information and Communication: Identify, capture, and communicate information accurately, efficiently, and securely.
5. Monitoring Activities: Periodically review controls to ensure they work.

Question 4

Where should a company have internal controls?

Answer 4

• Organization-wide
• Division level
• Operating unit
• Function (for example, accounting, marketing, and information technology)